Updated transactions guidance has been published by NHS Improvement ("NHSI") (Transactions guidance – for trusts undertaking transactions, including mergers and acquisitions) to assist NHS trusts and foundation trusts ("FT") considering organisational transactions (mergers and acquisitions ("M&A"), transfers and dissolutions) and non-organisational transactions (significant capital investments, joint ventures and private finance initiatives ("PFI")).
Trusts should note that the guidance consolidates and replaces "Supporting NHS providers: guidance on transactions for NHS foundation trusts (2015)", the transaction-related elements of "Delivering for patients: the 2015/16 Accountability Framework for NHS trust boards (2015)" and Appendix C of "Monitor’s Risk Assessment Framework". The guidance has also been aligned with the review process set-out in the integrated support and assurance process ("ISAP"), which will be used for projects (e.g. new models of care) involving novel and/or complex contracts. For further information on the ISAP please see our briefing: A Guide to the Integrated Support and Assurance Process.
A further update to the guidance is expected next year to cover the separation of FTs under section 56B. All references are to the National Health Service Act 2006 unless otherwise stated.
1. Updated risk-based assurance approach.
Following the introduction the Single Oversight Framework ("SOF") and lessons learned from recent transactions, NHSI have updated the factors that will be considered in determining the level of regulatory assurance needed for transactions.
During the risk assurance process a series of ratings (red, amber and green) will be used to determine whether or not expectations have been met.
2. Streamlined three-stage process with emphasis on early engagement with NHSI.
NHSI have combined the strategic outline case and outline business case ("OBC") into one document, the "strategic case", to generate the proposed organisational transaction ("Stage 1"). This approach will require trusts to provide detailed information at the start of the process, allowing issues to be identified and mitigated prior to the business case stage ("Stage 2"). The approvals stage, which concerns all the necessary regulatory and legal steps involved in completing the transaction ("Stage 3"), has not been amended. The streamlined process aims to reduce costs and allow trusts to identify issues prior to committing significant resources to a particular transaction. The time period between Stage 1 and Stage 3 has also been reduced. NHSI has indicated, for example, that a section 56A acquisition would take up to 16 months subject to risks identified during Stage 1 and Stage 2.
Although an OBC is no longer required for M&A as a separate review stage, where trusts are considering capital investments or PFI schemes, an OBC will still need to be prepared.
NHSI encourages trusts to engage with their NHSI regional team as early as possible to discuss the potential scope and options available prior to Stage 1. Professional advisors should be engaged from the outset (i.e. at Stage 1) to ensure legal and regulatory compliance throughout the process.
3. Identification of "red flag" issues at Stage 1.
NHSI have provided an indicative, non-exhaustive list, of "red flags", which, if identified, will require the parties to a transaction to undertake further work and/or to provide mitigation for any identified risks. In order to identify red flags consideration will be given to the following:
- Whether the proposed strategy contains a clear strategic rationale for the transaction;
- Will quality be maintained or improved;
- Is the transaction likely to result in an entity that is financially viable; and
- Is the trust able to execute the transaction successfully?
Where red flags have been identified, NHSI expect transactions to proceed only if the benefits to patients arising from the proposed transaction outweigh the issues identified and appropriate mitigations can be put in place. Whether or not the proposed transaction proceeds, and whether the Competition and Market's Authority is notified is the trust's decision, unless any trust to a transaction has been designated under segment 3 (mandated support) or 4 (special measures) of the SOF. If such designation applies, NHSI may prevent the transaction from proceeding or first require additional work to be undertaken before proceeding to Stage 2.
4. Guidance on capital investment to support a transaction.
NHSI has outlined how trusts should approach funding transactions where capital investment is required from the Department of Health ("DH"). NHSI have stated that where capital investment is crucial to the transaction, trusts should discuss these requirements with NHSI and DH in advance to allow the parties to agree a timeline for the required steps and review processes.
5. Overview of NHSI's M&A support offer.
NHSI have outlined the M&A support that they can provide to trusts, with such offering being determined on a case-by-case basis. The support available will initially be determined before Stage 1 and is linked to the levels of support available to trusts under the SOF as well as an understanding of the risk and priority of the transaction.
6. Lessons learned.
Section 8 of the guidance discusses lessons learned from a review of recent transactions, which identifies a section 56A acquisition as the most frequent transaction, considers management support agreements and due diligence and the importance of planning.
There are numerous detailed self-certification requirements set out in the appendices to the guidance. These include:
- Board certification
- Additional Board Statements that may be required by NHSI
- The Corporate Governance Statement (FT4)
In each case, trust boards will need to consider carefully their views on particular aspects of the transaction, testing these and evidencing that the issues have been considered in appropriate detail. Here the non-executive directors have a particular role to play in challenging and supporting executive director colleagues, together with the approval responsibilities of FT Governors. The public scrutiny that many significant NHS transactions undergo is the backdrop to these more onerous but necessary requirements in the guidance.
What should we be doing?
- Trusts that are considering taking part in a transaction should engage at an early stage with NHSI (and DH where capital investment is required) as necessary.
- Professional advisors should be engaged from the outset to ensure legal and regulatory compliance throughout the three stage process.
- When developing a proposed transaction, review your arrangements with professional advisers to ensure that there are clear, auditable divisions of responsibilities and lines of accountability.
- Trusts should consider their obligations under competition law and whether the proposed transaction is notifiable.
- Consider consultation and engagement obligations both internally and externally as part of the planning of any transaction.
- Trusts should consider the roles and responsibilities of executive directors, non-executive directors and governors when taking transaction-related decisions.